Alert – Australia's new tax regime for mining coal and iron ore – draft legislation now released

15 June 2011

On 10 June 2011 the Australian Government released the Minerals Resource Rent Tax (MRRT) Bill 2011 as exposure draft legislation for public consultation and comment. The MRRT is to apply from 1 July 2012 to the mining of iron ore and coal in Australia.

The recommendations made by the Policy Transition Group (PTG) form the basis of the design of the MRRT draft legislation. The PTG, led by the Minister for Resources and Energy, the Hon Martin Ferguson, and Mr Don Argus, provided a report on the implementation of the new MRRT and PRRT arrangements to the Government in December 2010 which included the technical design of the new resource tax arrangements. The report made 94 recommendations, which were accepted in full by the Government on 24 March 2011.

The Government is expected to release the PRRT exposure draft legislation for public consultation and comment in the next couple of months.

Legislation implementing the new resource taxation arrangements is expected to be introduced into Parliament towards the end of 2011. Below is an outline of the principles of the MRRT, based on the exposure draft legislation. The drafting and principles may change as the legislation progresses through the Australian Parliament.

The new MRRT for iron ore and coal

Questions

Answers 

When will MRRT apply? The new MRRT will commence on 1 July 2012 and will apply to all new and existing iron ore and coal projects.
Who is liable to pay MRRT? A miner is liable to pay MRRT, for an MRRT year, equal to the sum of its MRRT liabilities for each of its mining project interests for that year.
How is an MRRT liability calculated? The MRRT liability for a mining project interest for an MRRT year is worked out as follows:

MRRT liability = MRRT rate x (Mining profit – MRRT allowances)
What is the MRRT rate? The MRRT rate is 30% x (1 – Extraction Factor) where the Extraction Factor is 25% making the MRRT rate before company tax = 22.5% and after company tax = 15.75%

This should result in an overall effective tax rate of 45.75% applying to profitable mining projects (being 30% company tax + 15.75% effective after tax MRRT).
How is Mining Profit calculated? Mining profit = Mining revenue – Mining expenditure

Further details on what is included as Mining Revenue and Mining Expenditure are provided below.

Taxpayers with small amounts (i.e. $50 million or less per annum) of MRRT assessable profits (being mining revenue – mining expenditure) will receive an offset equal to the full amount of their MRRT liability. The offset reduces on a sliding scale for profits up to $100 million. Miners with low profitability may also use a simplified method of calculation based on accounting principles, with certain exclusions. The threshold is to be calculated having regard to connected/affiliated entities.
Can losses be carried forward? The MRRT will carry forward unutilised losses at the government long term bond rate plus 7 per cent.
Can mining project deductions be offset against other projects? The MRRT will provide transferability of deductions. This supports mine development because it means a taxpayer can use the deductions that flow from investments in the construction phase of a project to offset the MRRT liability from another of its projects that is in the production phase.
Will new investment be deductible? New investment will be subject to an immediate write-off, rather than depreciation over a number of years. This allows mining projects to access upfront capital deductions immediately, and means a project will not pay any MRRT until it has made enough profit to pay off its upfront investment.
How will existing projects transition into the new MRRT? Existing projects will have a starting base equal to either (at the taxpayer's choice):
the market value of the mine at commencement, which will be written down over a period of up to 25 years. Unlike other costs, this starting base will not be uplifted.
current written down book values of the project’s assets, excluding the value of the resource. This value will be written down over an accelerated depreciation period of 5 years. This starting base will be uplifted at the government long term bond rate plus 7 per cent.
What MRRT Allowances can apply?

MRRT Allowances in order of application are as follows:

  • Royalty allowance
  • Transferred royalty allowance
  • Pre-mining loss allowance
  • Mining loss allowance
  • Starting base allowance
  • Transferred pre-mining loss allowance
  • Transferred mining loss allowance

Mining Project Interests

Undertaking to extract taxable resources etc.

A participant (whether alone or with one or more other entities) has a mining project interest to the extent the entity is entitled to share in the output of an undertaking, the purpose, or a purpose, of which is:

  • to extract taxable resources from the area or land covered by a *production right; and
  • to produce an output that is:
  • a taxable resource extracted under the authority of the production right; or
  • something produced using such a taxable resource.

Note: There may be more than one undertaking to extract taxable resources from an area or land covered by a production right.


Example 1:

LesseeCo holds a mining lease under which it is authorised to extract coal from a specified area. However, LesseeCo has entered into a sublease with DiggerCo. The sublease confers on DiggerCo the exclusive right to extract coal from the whole of the area covered by the mining lease for the remaining term of the lease. LesseeCo is entitled to a royalty.

DiggerCo has a mining project interest comprising its right to extract all of the coal from the area covered by the mining lease. LesseeCo does not have a mining project interest.

Example 2:

CheckCo and BelCo enter into a contractual arrangement under which they agree to jointly acquiring a mining lease, and extracting, recovering and processing iron ore from the whole of the area covered by the mining lease. They agree that they will each take an equal share of the ore once it has been pelletised.

CheckCo and BelCo each have a mining project interest comprising their respective rights to share in the pellets.


No undertaking to extract taxable resources

However, if no such undertaking exists in relation to the extraction of some or all of the taxable resources from the area or land covered by a production right, a mining project interest exists to the extent the entity is entitled to extract such taxable resources from that area or land.


Example:

ProducerCo holds a production right, but does not have immediate plans to extract taxable resources from the area or land covered by the production right. It has not entered into any contractual arrangement affecting its entitlement to extract resources. ProducerCo has a mining project interest.


Further interests extract taxable resources etc

If, after the entity becomes entitled as mentioned above, the entity becomes so entitled to a further extent, the entity is taken to have a separate mining project interest corresponding to that further extent.

The separate mining project interests are combined into a single mining project interest if the requirements of the proposed Division 105 of the MRRT Bill are met (which provides rules to determine when mining project interests are combined).


Example:

CheckCo and BelCo have a contractual arrangement that each will take an equal share of iron ore recovered from an area covered by a mining lease. CheckCo later acquires BelCo’s entitlement to the iron ore recovered from the area.

CheckCo has a second mining project interest comprising the entitlement to BelCo’s former share of the iron ore.


MRRT liability

The miner’s MRRT liability for a mining project interest for an MRRT year is worked out as follows:
MRRT liability = MRRT rate x (Mining profit – MRRT allowances)
The following Method Statement applies for calculating the MRRT liability:
Step 1. Work out the miner’s mining profit for the mining project interest for the MRRT year.
Step 2. Work out the miner’s MRRT allowances for the mining project interest for the MRRT year.
Step 3. Subtract the MRRT allowances from the mining profit.
Step 4. Multiply the result by the MRRT rate. This is the miner’s MRRT liability for the mining project interest for the MRRT year.
Note: If the result from step 3 is zero, the miner’s MRRT liability will also be zero.

Taxpayers with small amounts of MRRT assessable profits (i.e. $50 million per annum or less combined with connected entities) will effectively be excluded from the MRRT.

The Taxing Point

The taxing point is central to determine the revenue and expenditure that make up the MRRT profit. The taxing point is:

  • the point just before the resource is removed from the run-of-mine stockpile on which it is stored;
  • for a taxable resource that is not stored on a run-of-mine stockpile:
    • if the resource is moved away from the immediate point of extraction to a place, at or adjacent to the point of extraction, where the resource enters the first beneficiation process after extraction - the point at which the resource enters that beneficiation process; or
    • if paragraph (a) does not apply - the point at which the resource is first moved away from the immediate point of extraction;
      for a taxable resource that is in a gaseous state, the first point at which the gaseous resource passes through a wellhead; or
      the point just before the first supply of the resource, if the time the resource is at that point is before the time it would be at the taxing point for the resource under any of the above.


Example:

Where, under an agreement, a resource is supplied to another party when the resource is delivered to the run-of-mine stockpile, the taxing point is just before the resource is delivered to the stockpile.


What resources are taxable?

A taxable resource is a quantity of any of the following:

  • iron ore;
  • coal;
  • anything produced from a process that results in iron ore or coal being consumed or destroyed without extraction;
  • coal seam gas extracted as a necessary incident of mining coal.


Example:

Gas extracted on an ongoing basis from a coal mine, or proposed coal mine, in order to comply with engineering requirements, mine safety laws or environmental conditions would be a taxable resource because its extraction is a necessary incident of mining the coal.

Gas extracted before coal mining begins as part of an independent commercial operation would not be a taxable resource because its extraction would not be a necessary incident of coal mining. Instead, that gas would be subject to taxation under the Petroleum Resource Rent Tax Assessment Act 1987.


Mining Profit

The following Method Statement applies for calculating the mining profits:
Mining profit = Mining revenue – Mining expenditure
Step 1. Work out the miner’s mining revenue for the mining project interest for the MRRT year.
Step 2. Work out the miner’s mining expenditure for the mining project interest for the MRRT year.
Step 3. If the mining revenue exceeds the mining expenditure, the difference is the miner’s mining profit for the mining project interest for the MRRT year.
Step 4. If the mining revenue does not exceed the mining expenditure, the miner’s mining profit for the mining project interest for the MRRT year is zero.
Note: Mining expenditure that exceeds mining revenue is a mining loss that may be applied in working out a mining loss allowance or a transferred mining loss allowance.

Mining Revenue

Mining revenue may consist of revenue from:

  • taxable resources extracted from the project area for the mining project interest, to the extent that the revenue is attributable to the resources in the form and place they were in when they were at their taxing point; and
  • economic recoupment of mining expenditure relating to the mining project interest; and
  • compensation for loss of taxable resources, and loss of amounts that would otherwise have been mining revenue, for the mining project interest.

The consideration amount is worked out as follows:

If the amount to be included relates to ... Then the consideration amount is ...  
A *supply between parties who were dealing at *arm’s length with each other in relation to the supply The consideration *received or receivable for the supply
A *supply between parties who were not dealing at *arm’s length with each other in relation to the supply The *arm’s length consideration for the supply
An exportation from Australia of the *taxable resource, or a thing produced from the taxable resource What would be the *arm’s length consideration for a *supply of the taxable resource or thing at the time of the exportation
Use of a thing produced from the *taxable resource What would be the *arm’s length consideration for a *supply of the thing at the time of the use.

The arm’s length consideration for a supply is the amount that would reasonably be expected to be received or receivable by the miner as consideration for the supply if:

  • the miner made the supply under an agreement between the miner and another entity; and
  • the miner and the other entity were dealing at arm’s length with each other in relation to the supply.

The method used to determine that amount is to be the method that, having regard to the miner’s circumstances, produces the most reliable measure of that amount.

However, the arm’s length consideration for a supply is the amount that is, in the Commissioner’s opinion, fair and reasonable if:

  • because of an insufficiency of available information; or
  • for any other reason as determined by the Commissioner;

it is not possible or not practicable to work out the arm’s length consideration.

Mining Expenditure

Mining expenditure for a mining project interest includes expenditure necessarily incurred in carrying on mining operations upstream of the taxing point.

Mining operations for a mining project interest are upstream mining operations for the mining project interest to the extent the operations relate to either of the following:

  • extracting *taxable resources from the *project area for the mining project interest;
  • getting taxable resources extracted from that project area to their *taxing point.

It does not matter where, or when, the operations are carried out.


Examples:

The following are some examples of operations or activities that might be upstream mining operations:
obtaining the agreement of native title owners to the grant of a mining tenure over the project area;

  • exploring for taxable resources in the project area;
  • crushing and weighing the taxable resources before they reach their taxing point;
  • training, engaging, employing, paying, accommodating and ensuring the safety of personnel, and other supportive head office activities, to the extent they are involved in operations or activities relating to getting the taxable resource to the taxing point;
  • developing plans and engineering specifications for, and constructing, facilities (whether in the project area or not) to be used in recovering, transporting and storing the taxable resources before they reach their taxing point;
  • acquiring and maintaining plant or equipment for use in recovering, transporting or storing the taxable resources before they reach their taxing point;
  • upgrading computer software used to control inventory (like consumables and spare parts) used for recovering, transporting or storing the taxable resources before they reach their taxing point.

However, some expenditure is specifically excluded, including:
Cost of acquiring rights and interests in projects (the starting base allowance operates as a proxy for the cost of acquiring rights. although the allowance may be greater or lesser than the acquisition cost in particular circumstances).

  • Royalties
  • Financing costs
  • Hire purchase agreements and finance leases
  • Non-adjacent land and buildings used in administrative or accounting activities
  • Hedging losses or foreign exchange losses
  • Rehabilitation bond and trust payments
  • Payments of income tax or GST


Mining Allowances

The MRRT allowances, and the order in which they are applied in working out MRRT liabilities, are as follows:

  • Royalty allowance
  • Transferred royalty allowance
  • Pre-mining loss allowance
  • Mining loss allowance
  • Starting base allowance
  • Transferred pre-mining loss allowance
  • Transferred mining loss allowance

Treatment of State Royalties

Mining royalties paid to States and Territories reduce a miner’s MRRT liabilities for a mining project interest. To work out the royalty allowance, the amount of the royalty is grossed-up using the MRRT rate, in effect reducing the MRRT liability by the amount of the royalty.

Royalty credits that are not applied in an MRRT year are uplifted and may be able to be applied in later years.
Note: Royalty credits that are not applied to a royalty allowance may be applied to transferred royalty allowances for other mining project interests (see proposed Division 48).

Author(s) Karen Payne